Question
Relating DSGE and AS/AD for a financial friction shock: Consider the complete dynamic response of the economy to a temporary rise in financial frictions in
Relating DSGE and AS/AD for a financial friction shock: Consider the complete dynamic response of the economy to a temporary rise in financial frictions in the AS/AD framework. (A) Draw th AS/AD graph assosicated with this shock. (B) Plot the impulse response function of GDP to this shock, according to the AS/AD model. You do not need to worry about numbers on the vertical axis; just show the general pattern as the economy moves after the shock and eventually returns to the steady state. (C) Plot the impulse response function of inflation to this shockey, acording to the AS/AD model. (D) Compare youur results in these two stylized plots to the impulse response function from the Smets-Wouters model shown in the figure attached.
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